Business Reporter

It is now five years since Wesfarmers acquired Coles for $19 billion at the peak of the sharemarket boom, but despite 13 consecutive quarters of the supermarket operator beating Woolworths in comparable store sales, neither of Australia’s giants has lost out from the renewed competition between them.

One of the main reasons for this is Australia’s duopoly market structure, according to research from Macquarie Private Wealth.

Milk for $1 a litre is crazy prices.

The pervasiveness of the Coles and Woolworths supermarkets ensures they both build market share against other competitors.

Macquarie says that Coles’ and Woolworths’ share of the $112 billion grocery market has increased over the last five years from 48 per cent to 56 per cent.

‘‘We don’t see any future gains by Coles coming at Woolworths’ expense,’’ the broker said, adding that the duo could capture up to 80 per cent of the market’s growth between them.

‘‘With Aldi and Costco growing also, this makes it hard for food specialties and Metcash independents.’’

When Kathmandu founder Jan Cameron pulled the plug last week on her discount chain operator, Retail Adventures, one of the factors she cited was the inability of the company’s Chickenfeed stores in Tasmania to compete on food in the wake of the milk and bread wars between Coles and Woolworths.

‘‘Tasmania as a whole has been very difficult, I think they have been more affected by the downturn, the GFC, and the retail landscape over the last three years has changed quite dramatically with the supermarket wars, it has become a very, very competitive scene,’’ she said.

She said fresh food, milk and cheese and bread were a strong part of Chickenfeed’s convenience offer in Tasmania. When the supermarket milk war started, the major chains were ‘‘undercutting and loss-leading’’ to the extent that her Chickenfeed chain could not afford to stay in this market.

‘‘Milk for $1 a litre is crazy prices. I think that consumables business in Tasmania suffered more than other states,’’ she said.

But the milk wars was merely a contributor to Retail Adventures’ demise, with Ms Cameron admitting that the business she acquired out of receivership in 2009 was flawed from the start.

Around 630 employees will have lost their jobs by the end of this month from store closures but another 4000 staff remain in employment with the group.

In a letter to BusinessDay last month Coles chief Ian McLeod also refuted that the price wars were to blame for the demise of the corner shop. He pointed out out that they had instead been replaced by hundreds of convenience stores established in recent years by chains like 7-Eleven.

But the shop front has not provided the biggest gains for the supermarket operators in any case.

Macquarie says the biggest contributor to profit growth is the transfer of profits from the companies that supply products to Coles and Woolworths.

The broker estimates that the big two have crunched supplier profit margins by 6 per cent over the last five years in what it describes as ‘‘the ongoing profit transfer from suppliers to retailers’’.

Rob Murray, the departing chief executive for food and beverage group Lion, said the milk portion of its dairy business was in a terrible state and not too dissimilar to the profitability profile of a charity.

‘‘We have a challenge which is the core of the business, the fresh milk business, which is a charity – in fact a lot of charities do better,’’ Mr Murray said.

He laid the blame for the sliding profits squarely at the feet of Coles and Woolworths, and their private label milk priced at $1 per litre, which undercut branded milk sold by Lion.

‘‘We don’t make any money [on milk],’’ Mr Murray said. ‘‘The simple truth of that is nobody is making money and you can’t make money if [consumers] buy milk at $1 a litre, it physically can’t be done.’’

He said Kirin, which owns Lion, had paid a ‘‘suicidal price’’ of more than $3.9 billion for the dairy business, which was now worth less than $2 billion.

Neither supermarket operator has taken this criticism lying down.Both Woolworths and Coles have relied on one unassailable fact.

‘‘As consumers are paying less for their groceries now then they were a year ago, you would be hard-pressed to demonstrate that consumers are losing out,’’ says Mr McLeod.

He also points to the success of Aldi and Costco as proof of the competition in the supermarket sector, and low barriers to entry.

The most surprising finding out of the Macquarie research is that despite Coles closing the gap with strong underlying sales growth in food and liquor, Woolworths larger scale has ensured that it has slightly increased its lead over the last five years in terms of sales and earnings before interest and tax. Macquarie estimates that Woolworths food and liquor sales was 36 per cent greater than Coles’ in 2007, but 44 per cent higher for the 2012 financial year. In terms of earnings before interest and tax, Woolworths was 131 per cent higher in 2007 and 133 per cent higher last year.

16 comments

An absolute scandal that this duopoly is allowed while driving our farmers out of the industry. Oz is particularly good at minimising competition ie Banks, Newspapers/Cable TV/ Elect providers and of course there's Packer with his Casinos. And then, Tom Waterhouse has just left the gates.

Commenter

Hobie

Date and time

November 02, 2012, 12:06PM

It isn't the duopoly that is driving our farmers out of the industry. Pointing the finger at one might relieve us of feeling guilty but anyone who has bought $1 per litre milk is responsible too. The milk market is complex. Farmers have little choice who they sell too. How many milk producers (who pasteurize and bottle) actually are within reasonable distance of a diary? I suspect a monopoly out of necessity. Those producers are the ones entering contracts for the generic brand milk at a cheap price. We buy the milk at $1 per litre without considering the consequences.

Pointing a finger at the duopoly is a convenient displacement of our own responsibility. The power for change is with the end consumer. We are the market for $1 per litre milk. If there was no market, it wouldn't exist.

The reality is we'll reap what we sow. Eventually enough farmers will pull out of milk that the supply will allow the remaining farmers to set the price again. There just won't be enough milk for Coles & Woolworths to supply at $1 per litre.

Commenter

PT

Date and time

November 02, 2012, 12:35PM

PT - you're 100% right. The consumer can choose what they like or feel good about. They aren't forced to buy $1 milk, but they vote with their wallets. And only worry about the consequences when it's too late. Coleworths are just buying market share and the consumer is actively helping them. The only shame is that the ACCC defines "competition"" so narrowly and has allowed hardware, petrol and liquor to also fall into the duopoly.

Commenter

Michael

Date and time

November 02, 2012, 1:40PM

I buy locally produced milk only. No generics or chain brand. The problem lies with the scabby buyers trying to save 80c a week.

Commenter

Liberator

Location

SEQLD

Date and time

November 02, 2012, 2:08PM

The consumers and the manufactures are losing not the retailer coles & woolworths are laughing all the way to the bank. They are the only ones making money out of this they increase their prices on other stuff like fuel. I can go to Aldi and buy what I need and still come back with change can't do that at Coles or Woolworths.

Commenter

Wayne

Location

Brisbane

Date and time

November 02, 2012, 12:11PM

While Coles and Woolies are lining their pockets, the farmers of Australia are being torn to pieces. How about passing a little of that profit margin to those providing you with stock. If the next few years move like the past, there won't be any farmers left to cater for demand.

Commenter

Daily reader

Location

Melbourne

Date and time

November 02, 2012, 12:13PM

The two big supermarket chains are squeezing their suppliers until they cease to exist. I can't see how this is helping the Australian consumer, as a lot of these same consumers are employed by the endangered supplier. I know then they will just import their goods from China, where things are still cheap, but not necessarily better.I can't understand why the big two don't work with their suppliers to build a sustainable relationship allowing everyone in the chain to make a fair and reasonable profit so they can all survive. I never buy the cheapest nastiest they offer anyway, the cheap milk for example contains permeate, so you're not really buying milk at $1 a litre, you're buying waste product from cheese manufacturing mixed with milk to make it look like milk. Shame it doesn't taste like milk.Anyway, squeezing your suppliers to death is like cutting off your toes so you can wear smaller and cheaper shoes.

Commenter

D0GMATIX

Location

Earth

Date and time

November 02, 2012, 12:21PM

All milk contains permeate. Some milk does not have added extra permeate, but to call milk 'permeate free' is like trying to sell dry water.

Commenter

Michael

Location

Adelaide

Date and time

November 02, 2012, 12:45PM

Hooray for lower prices I say. The cost of groceries in this country is a JOKE. Finally prices are coming down and that's a good thing IMO.

Commenter

InSilence

Date and time

November 02, 2012, 12:24PM

@ InSilence

Agree cost of CERTAIN groceries in this country are a joke, can can come down lower. These are not your daily staple products, but more or less the ones that you buy occassionally or on impulseBut one day you may have a family member out of a job or a farmer comitting suicide on his farm as the bank reposses a generations of family run businesses.

Till then these theiving two will lure you in on so called 'specials' which are 90%+ of the times forced to be born by the suppliers and if not, then get reprimanded and threatened with business reduction by downsizing their distribution and shelf spaces.